Housing costs may significantly change when an employee is on assignment. How are these expenses treated under the "balance sheet approach"?
Housing costs are an important component of the balance sheet. When an employee accepts an international assignment, their housing costs change. The employee´s purchasing power is protected under the balance sheet approach by providing allowances or reimbursements for housing costs that are in excess of what the employee would have incurred at home. The employee still pays a monthly housing cost similar to what they incurred at home, their "norm", and the company pays for higher costs in the assignment location. The amount of housing support the company provides is usually obtained from third party vendors, local market information, or from internal information.
Companies need to make a policy decision in the housing area about whether the employee will receive "free housing" in the host location (the company pays for everything), or if the company will reimburse incremental costs in the assignment location. When a true balance sheet approach is used, the employee continues to incur housing costs similar to what they would have incurred at home during the assignment. There may be times when the company wants to provide additional incentives to employees on international assignment and as a result the company decides to pay for all of the housing costs during the assignment. The provision of assignment location housing at company expense without participation in these costs by the employee will increase the overall costs of the assignment. Additionally, there is a possibility that some employees will be placed into a position where they no longer know how to budget for housing costs at the end of their assignment and suffer financial difficulties at the end of their assignment.
In keeping with the balance sheet approach, the housing contribution, or "norm", in a perfect world would always equal the surveyed amount provided for the location where the employee is departing from. In practice, companies will find that their employee´s have housing situations that will vary widely. Many companies will review the employee´s home country housing situation very closely when determining how much housing norm to collect.
An example of how the housing norm component of the balance sheet approach works will help identify some of the issues you may encounter when you move your assignees. As a reminder, the delivery of incremental housing support in the host location may vary based on the assignment tax planning and other corporate strategy that you have in place.
In our example, let us assume that a single person leaving from a position in Manhattan would be expected to incur $1,500 per month in housing costs based on the surveyed data purchased from a housing vendor. During a pre-departure meeting with the employee to review the compensation package, questions may arise about lease breakage expenses that will be incurred. The employee could also indicate that they have been sharing a two-bedroom apartment and their monthly housing costs are only $1,000 per month. In this case some companies will adjust the housing norm from the surveyed amount to the actual documented costs the employee is incurring so that the employee does not have a significant increase in their housing costs during the assignment.
If our transferee is a homeowner, there may be a time lag between when they are able to occupy their host country housing and they are able to obtain a tenant in their home. Since the homeowner is making their regular monthly mortgage payment without the new rental income stream should the housing norm be collected? Many companies will delay the collection of the housing contribution until the employee´s home is rented as they are continuing to incur housing costs in the home location. When this delay is allowed, many companies will cap the number of months that the employee can pay only their mortgage payment so that there is an incentive to rent the home.
